Consolidation Ahead of Jobs

The US dollar is little changed against most of the major currencies as the last key event ahead of the weekend is awaited--the US February employment report.  The Japanese yen is the main exception to the generalization.  Follow through selling has been seen in Asia and Europe after yesterday's slide.  Barriers thought to been around JPY95.25 and JPY95.50 have been triggered and the dollar remains firm.  The euro, which was not able to maintain the upside momentum seen yesterday against the dollar, extended its gains above JPY125.  

Japan did report a third consecutive current account deficit.  However, the January deficit was roughly half of what was expected and exports did rise 6.7% from year ago levels.  At a high level the trade deficit still worsened faster than the income surplus increased. 

 

As we have noted before, there continues to be reports of good demand for JPY100 strike dollar calls, which seems to be a common target.  Similarly, in the Nikkei, which tacked on another 2.6% (for a 5.8% gain on the week), many are looking at a 13,000 target (today's close:  12,283).  

China reported its trade figures for January.  The $15.25 bln surplus was twice consensus expectations.  Simply put, exports rose more than expected (+21.8% year-over-year vs expectations for +8.1%), while imports fell more than expected (-15.2% vs -8.5%).  Activities associated with the Lunar New Year is seen as distorting the data, but beyond the noise many see a strong report.   Some selling pressure on the dollar-bloc was linked to the decline in imports, but the losses were recouped.  

The focus in North America is on the jobs reports.  Both Canada and the US release the February jobs report.   The divergence between the housing markets of the two countries is a bit ironic. On various metrics, the housing market is recovering in the US.  It is rolling over in Canada.  This appears to be a factor weighing the Canadian labor market.  After losing 21.9k jobs in January (20.6k full-time), the consensus calls for an anemic 8k rise in February.   

Given that the US economy is roughly 10x bigger than Canada, the 8k increase would be the rough equivalent of 80k increase in the US.  The market will be disappointed if less than twice is reported.  The consensus calls for a 165k increase after 157k in January.  The government sector is still seen as a drag on employment, leading to somewhat stronger numbers from the private sector.  The poor weather may potentially have distorted the data and the market will be sensitive to such adjustments.  

A report near consensus strikes as consistent with growing evidence of the resilience of the US economy in the face of increase in taxes and cuts in spending.  In recent days the ISM reports surprised on the upside.  The 4-week moving average of weekly initial jobless claims is at a new cyclical low.  The slowdown in business spending and hiring ahead of the fiscal cliff that many anticipated never materialized.  After slowing markedly in Q4, the US growth is likely to return to 2% pace seen on average since mid-2009. 

Turning to Europe, the ECB staff growth and inflation forecasts were trimmed yesterday as widely expected.  Yet besides hinting that some members may have wanted to cut rates, Draghi did not throw any bones to the dovish expectations.  We took away from his comments that the ECB is still hopeful of a recovery later in Q2, which means it can only be after then that a rate cut is possible if those hopes prove for naught.  

This is to say the window of opportunity for an ECB move is late Q2 or early Q3. One implication of this is the weak data from Q1 or even early Q2 is not important from a policy making point of view.   We also take away from Draghi's comments that the bar to another LTRO or some other innovation is much higher.  Lastly, despite some speculation, Draghi seemed to close the door to a negative deposit rate.  

One of the bigger surprises this week has been the relative resilience of the Italian asset markets despite seemingly lack of progress toward political clarity.  Italian 10-year yield fell 30 bp this week, which means that net-net it has increased about 13 bp from the eve of the election.  The 2-year yield is off 27 bp this week and at 1.72% is about 7 bp higher than it was prior to the election.  The FTSE Milan Index is up 2.8% on the week, less than 1% below pre-election levels.  Although it performance this week lags behind the other large bourses in the euro area, it is twice gain of the UK FTSE and may outperform the S&P 500 as well.